Cattle, Corn Market Truisms Are…Well, True

Market truisms, it appears, are still true. Like this one, for example—the best cure for high prices are high prices. If the numbers from one market analyst are true, and they probably are, corn farmers are fixing to learn that lesson in spades over the next few years.

Dan Basse, president of AgResources in Chicago, spoke recently at the Certified Angus Beef Feeding Quality Forum in Garden City, KS. Among the many pearls he unloaded into cattle feeders’ bag of jewels was his outlook for corn prices.

If you’re a corn farmer, stop reading now. It’s bloody. But remember, you did it to yourself.

If you’re a cattle feeder, you’ll want to do handsprings. Go ahead. It’s been a long time coming. Just try not to pull anything.

Some years ago, in an effort to move the corn market higher, corn farmers (and others) were successful in convincing the government to replace MTBE with ethanol as an oxygenate in gasoline. Almost overnight, at least in market terms, corn prices shot to levels that I suspect even surprised corn farmers.

And while the grain-ethanol complex saw wildly high profits in some cases, others in agriculture had decidedly different experiences. For them, Basse’s recent predictions come as welcome and long-overdue good news.

And in another time, another cattle cycle, you could say with a fair degree of accuracy that eventually, cattle producers will also “do it to themselves," in terms of overproducing and driving prices lower. Won’t happen this time, or if it does, it will be a very long time coming. Thanks to a variety of factors, ethanol among them, we must learn to deal with a permanently smaller cattle industry.

According to Basse, corn farmers are looking at a trifecta of bad news. The ethanol business has matured. So while it will continue to pull 4.6 to 5 billion bushels of corn off the market every year, ethanol usage and demand has stagnated and is projected to slowly decline in the years ahead.

What’s more, ethanol-fueled corn prices have encouraged every other country in the world to grow more corn. As a result, the U.S. share of the world grain trade has hit its lowest level ever, meaning U.S. corn farmers are fighting for their lives in the export market. And thanks to those same ethanol-fueled grain prices, the U.S. livestock sector is stagnant at best and in the case of beef, slowly declining. Corn demand there will be a long time coming back.

Now clearly, ethanol isn’t the only reason cow numbers are declining. But it’s certainly been a contributing factor the past six or seven years and has contributed to a permanently smaller beef cattle industry.

“These changes don’t happen very quickly,” Basse says. “This is what high corn prices have done for numerous years. So our firm has been hired by the likes of seed companies and fertilizer companies to decide who’s the lowest-cost corn producer in the world, because they want to know where to put their resources. And I can tell you, it’s not the U.S.”

In fact, Basse predicts a multi-year trend of weakening grain prices. “Actually we think the multi-year trend of weakening grain prices could last until 2016 or 2017.”

While he cautions that a 2017 timeline for grain price predictions is a long way out and that Mother Nature will have a lot to say about its accuracy, it is welcome news for all cattlemen, cattle feeders in particular.

“We think corn could go to $4.25 by harvest,” Basse said. “When was the last time you were able to buy $4 corn for cattle feeding purposes? It’s been a long time.” And it gets better (or worse, depending on your perspective). “I cannot rule out $3.00 to $3.50 corn a year from now, (fall 2014) if indeed Mother Nature is normal,” he says. “Ugly. Unless you’re feeding cattle.”

Corn farmers have enjoyed quite a ride the past six or seven years. But it appears the merry-go-round has ground to a stop.

So as corn farmers enter what appears to be a multi-year timeframe of lower corn prices, we will likely and predictably begin to read and hear any number of sad tales of farmers left holding overpriced farmland as prices tumble, overpriced machines as prices tumble and corn dumped on the market at less than cost of production. Since much of that land and machinery was paid for with cash, we won’t see a major shakeout like happened in the past.

All that said, we will see a definite change in fortunes for many who hitched their wagon to ethanol’s rising star. As that plays out, here’s a word of advice—don’t look to cattle feeders for sympathy. ‘Cause it ain’t gonna happen.